TransWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Georgia Cable Company (GCC), a regional cable company. TransWorld's analysts project the following post-merger data for GCC (in thousands of dollars):

If the acquisition is made, it will occur on January 1, 2015. All cash flows shown in the income statements are assumed to occur at the end of the year. GCC currently has a capital structure of 40% debt, but Trans World would increase that to 50% if the acquisition were made. GCC, if independent, would pay taxes at 20%; but its income would be taxed at 35% if it were consolidated. GCC's current market-determined beta is 1.40, and its investment bankers think that its beta would rise to 1.50 if the debt ratio were increased to 50%. The cost of goods sold is expected to be 65% of sales, but it could vary somewhat. Depreciation-generated funds would be used to replace wornout equipment, so they would not be available to TransWorld's shareholders. The riskfree rate is 8%, and the market risk premium is 4%.
a. What is the appropriate discount rate for valuing the acquisition?
b. What is the continuing value?
c. What is the value of GCC to TransWorld?

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2015 $450 45 18 2016 $518 53 21 2017 $555 60 2018 $600 68 27 Net sales Selling and administrative expense Interest Tax rate after merger Cost of goods sold as a percent of sales Beta after merger Risk-free rate Market risk premiumm Continuing growth rate of cash flow available to TransWorld 3596 65% 1.50 896 496 7%